RBA lifts cash interest rate by 25bps

The Reserve Bank of Australia (RBA) says its decision to tighten monetary policy
will help ensure sustainable economic growth and keep inflation close to its two to
three per cent target band.
The central bank on Tuesday raised the cash rate by 25 basis points to 3.50 per
cent, from 3.25 per cent, following its monthly board meeting, and followed a
similar rise in October.
It was also the fourth time in a row the bank has altered rates on Melbourne Cup day.
Governor Glenn Stevens said the board continued to believe it was "prudent" to raise
rates, now that the risk of a serious contraction in the Australian economy had
passed.
"The board's view is that it is prudent to lessen gradually the degree of monetary
stimulus that was put in place when the outlook appeared to be much weaker," he
said.
"The adjustments at the October and November meetings will work to increase the
sustainability of growth in economic activity and keep inflation consistent with the
target over the years ahead."
Mr Stevens said economic conditions in Australia had been stronger-than-expected, as
measures of confidence recovered, and there were early signs of an improvement in
labour market conditions.
It also appeared that private investment would not be as weak as earlier expected
and were likely to strengthen in the medium term.
"The rate of unemployment is now likely to peak at a considerably lower level than
earlier expected," he said.
Mr Stevens said the rate of consumer price index (CPI) inflation had been declining
for the past year.
"In underlying terms, inflation should continue to moderate in the near term, but
now will probably not fall as far as earlier thought," he added.
"Headline CPI inflation on a year-ended basis has been unusually low because of
temporary factors, and will probably rise somewhat over the coming year.
"Both CPI and underlying inflation are expected to be consistent with the target in
2010."
The RBA's target band for inflation is two to three per cent over the economic cycle.
"The board noted that the rise in the exchange rate is likely to constrain output in
the tradeables sector and dampen price pressures," Mr Stevens.
"Nonetheless, growth is likely to be close to trend over the year ahead and
inflation close to target."
Mr Stevens said the global economy has resumed growth and that world policy settings
were likely to remain expansionary for some time.
"The recovery is likely to continue during 2010 and forecasts have been revised
higher," he said, noting that the recovery was generally expected to be modest in
the major countries.
However, the prospects for Australia's Asian trading partners appeared to be
"noticeably" better.
"Growth in China has been very strong, which is having a significant impact on other
economies in the region and on commodity markets," he said.
"For Australia's trading partner group, growth in 2010 is likely to be close to trend."
Meanwhile, domestic housing credit growth has been solid, even though dwelling
prices have risen.
Sentiment in global financial markets is much better and the local share market has
recovered significant ground, he said.